What to expect from a financial plan?
Creating a financial plan can be a simple or complex process. Much of this is determined by your personal circumstances. If you are a single young professional just concerned about saving for retirement, I would qualify that as a fairly simple case to solve for. We can plan for the outcome you would like; implement, track and change as needed.
I would say things can get a bit more complicated as you add on multiple goals, multiple people, life events, job changes and more. Now begin to add in real estate, businesses, business partners, blended families, tax planning, estate planning and how all these things integrate with your evolving goals. Plus a changing world, markets, products and laws. You can start to visualize how financial planning can get more complex on a case by case basis.
That may be why I never loved the question about what I do, because it varies depending on each clients needs, wishes and aspirations. With that being said.... let me outline some of the areas I look to address when coordinating a financial plan.
Assuming a client has a handle on some of the basic principles of money management such as budgeting, paying off debt, adequate income, etc...
I am going to move on to 3 areas I want to address with all financial plans.
Protection
When I am talking about protection planning. I am simply trying to address the "what if's" that hopefully never happen, but if they do happen you and your loved ones are protected as much as possible.
Emergency Fund
Here I stress the importance of an emergency fund. How much you need is debatable depending on debt, expenses, income, job stability, etc.... Generally speaking, I would suggest working your way up to 6 months of your living expenses.
The purpose of an emergency fund is to have cash on hand for unexpected life events. An example may be a temporary job loss due to a global pandemic like COVID-19, a short term disability, or a home repair like replacing a roof.
The point being.... you want to have cash available for short term expenses so that it doesn't have a drastically negative impact on your finances. You can almost think of it as a short term lending account that you can borrow from during tougher times. My hope is that you would have an emergency fund in place so you may never need a credit card again.
Insurance
There are many types of insurance. Such as: property, car, business, health, home, renters, etc...... There are 3 types of insurances I tend to review when creating a financial plan. Obviously, I may talk about other coverages depending on the case. However, life, disability and long term care are integral to a personal financial plan.
During the review, I look to see what existing coverage is in place. Next, I look to see if there are any obvious gaps in coverage that need to be filled. The need for coverage depends on quite a few different factors. For example, a small business owner may not have any coverage available through an employer because they are the employer. So, they would need to make sure they have necessary coverage on their own.
Life Insurance
You need life insurance as soon as someone may rely on you for support. Typically, a spouse or young child. Term life insurance is usually a given for accumulators to support their families against a pre mature death. If you are a non smoker in good health, term life insurance is very affordable. It would be irresponsible to not have protection in place.
The amount of coverage may vary based on factors such as income replacement need, assets, liabilities, funding goals and existing coverage. Generally speaking, I find term insurance is usually 10-20x annual income.
Disability Insurance
Depending on your occupation, you may need to purchase additional long term disability coverage. I am usually addressing "long term" coverage. My hope is that you will have that Emergency Fund in place to handle short term disabilities. Disability coverage recommendations vary greatly from client to client because of the various group coverages available.
Long Term Care Insurance
As you accumulate assets and get closer toward retirement, we need to have a conversation around long term care. Long term care insurance may be the most complicated and nuanced of these 3 coverages. What I would ask a client that is in the demographic for long term care insurance is..... "What would you like to happen in the event you need long term care?"
Not having Long Term Care insurance is a plan that you are self insured, which may be ok? But my job to educate you on the various solutions and options to give you the information needed to make an educated, confident decision around long term care.
Remember, with insurance you need to think about it before an event happens.
Savings
I often say, "this is the what and where of a financial plan! What should you be saving and where should you be saving it?"
The answer to that, depends a lot on the clients current situation and financial goals.
Creating a savings plan is an important part of reaching your financial goals. Ultimately, we all would love to be able to achieve, save and spend on all our wants and dreams. While that may be the case for some, many of us have to prioritize our savings toward those goals that are most important.
Goals are a judgement free zone. I want my clients dream as big as they want and be as ambitious as they desire. They can also be as simple as maintaining your current lifestyle now and throughout retirement.
💡The point is, they are your goals! Not mine.
Once, we have an idea on your goals and what you are working toward. We will create a savings plan to address them. You may or may not be able to accomplish everything all at once. Regardless, we want to get you heading in the right direction. The most obvious goal clients are saving for long term is retirement.
So, what are you saving for in the short, intermediate and long term?
Investing
Recommendations around investing depends on the client. Many of the principals may overlap from client to client, but specifics may vary based on numerous factors.
Some of the most common factors that impact investment recommendations include:
Time frame - How long are investing for? When are you going to take a withdrawal?
Risk tolerance - How much volatility or draw down can you handle in your account?
Risk management - Are there any specific risk management strategies being used?
Taxes - How is the account taxed?
Tax Bracket - Current tax bracket and potential future tax bracket.
Existing Holdings - What do you already own?
Account size - Are you starting off with $1000 or do you already have $1,000,000 invested?
Investment experience - What is your knowledge around investments?
Previous behavior during market corrections.
and more.......
In continuing with our conversation on goals. Depending on the "what and where" we are saving, may impact portfolio recommendations. It is not uncommon to have multiple accounts with different portfolios and strategies.
For example..... a client may have ROTH IRA with a 40 year time horizon and an aggressive risk tolerance; while have a non qualified investment account with a 5-10 year time horizon and a more moderate risk tolerance. These accounts will likely be invested differently given the goal, time frame and taxation of the accounts.
In conclusion, creating a financial plan allows for a comprehensive review of all areas of your financial life. It is a time to look at how the various aspects of your financial situation integrate with one another. It also provides a space to lay out exactly where you stand and provides a framework to share your current and future goals.
A financial plan should evolve as your situation changes. I would like to think of it as a roadmap toward achieving your goals. While there may be detours along the way, making sure you are heading in the right direction as soon as possible sounds prudent.
-RCL
